Group assignment presentation 8
Problem 1. The following table shows the demand & cost data for a
monopolist:
Quantity Price ($) Total Marginal Total Average Marginal
revenue revenue cost ($) total cost cost ($)
($) ($) ($)
0 8.5 5
1 8.0 9
2 7.5 11.5
3 7.0 12.5
4 6.5 13.5
5 6.0 14.0
6 5.5 16.0
7 5.0 20.0
8 4.5 25.0
9 4.0 32.0
10 3.5 40.0
a. Complete the table
- TR = Q x P
- MR = ∆TR/∆Q
- ATC = TC/Q
- MC
Quantity Price ($) Total Marginal Total Average Marginal
revenue revenue cost ($) total cost cost ($)
($) ($) ($)
0 8.5 0 - 5 - -
1 8.0 8.0 8.0 9 9.0 4.0
2 7.5 15.0 7.0 11.5 5.75 2.5
3 7.0 21.0 6.0 12.5 4.167 1.0
4 6.5 26.0 5.0 13.5 3.375 1.0
5 6.0 30.0 4.0 14.0 2.80 0.5
6 5.5 33.0 3.0 16.0 2.67 2.0
7 5.0 35.0 2.0 20.0 2.857 4.0
8 4.5 36.0 1.0 25.0 3.125 5.0
9 4.0 36.0 0 32.0 3.56 7.0
10 3.5 35.0 -1.0 40.0 4.0 8.0
b. What quantity will the monopolist produce?
- The monopolist will produce such a quantity to maximize production profits:
To maximize profit, we have: MC = MR => Q*= 6
c. What price will the monopolist charge?
- The price that the monopolist charge:
- At Q* = 6 => P* = 5.5
d. What will the profit be at this price?
- At this point, the monopolist's profits are maximized
Πmax = Q* (P* -ATC* )
Πmax = 6(5.5 – 2.67) = 17 ($)
Problem 2: A firm has demand function of P=100-Q ($) and total cost
function of TC=500+ 4Q+Q2 ($).
a. Is this firm a perfectly competitive firm? Why?
- This isn’t a perfectly competitive firm because:
+ Perfect competition have demand curve is horizontal, perfectly elastic D
+ But in this case, demand function is P = 100 – Q
=> negative slope D => monopoly
b. What is price and quantity to maximize total revenue? What is that
maximum total revenue?
- We have: TR = PxQ Q 0 50
TR = (100 – Q)Q = 100Q – Q 2
TR’ 0
TR’ = 100 – 2Q = MR
- To maximize total revenue: TR
We have: TR’ = 0 => Q = 50 units
TRmax = 2500 ($)
c. What is price and optimal quantity to maximize profit? What is that
maximum total profit?
- We have:
MC = TC’ = 4 + 2Q
ATC = TC/Q = 500/Q +4 +Q
- To maximize profit: MC = MR
=> 4 +2Q = 100 – 2Q => Q* = 24
- At Q* = 24: P* = 100 – 24 = 76 ($)
ATC* = 500/24 +4 +24 = 48.83 ($)
=> Πmax = Q*(P* - ATC*)
= 24(76 – 48.83) = 652 ($)
d. Asume government imposes a tax of 8 $ per unit of good sold, what is
price and optimal quantity that gives the firm maximum profit? What is
this maximum profit?
- Government imposes a tax of 8$ per unit of good sold:
TC = 500 +4Q +Q2 +8Q = 500 +12Q +Q2
MC = TC’ = 12 +2Q
= $56.72
- To maximize profit: MC = MR => 12 + 2Q = 100 – 2Q => Q* = 22 units
- P* = 78 ($); ATC* = 56.72 ($)
Πmax = 468 ($)
e. Asume government imposes a fixed tax of 100 $, what is price and
optimal quantity that gives the firm maximum profit?
- Government imposes a fixed tax of 100 $:
TC = 500 +4Q +Q2 + 100 = 600 +4Q +Q2
MC = TC’ = 4 +2Q
- To maximize profit: MC = MR => 4 + 2Q = 100 – 2Q => Q* = 24 units
- P* = 76 ($); ATC* = 53 ($)
Πmax = 552 ($)
